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If You Are Seeking a Loan Under the CARES Act, Compliance is Key

The Coronavirus Aid, Relief, and Security Act (“CARES Act”) will provide billions of dollars in loans and assistance to the private sector.  This will include loans for payroll and operating expenses under the Paycheck Protection Program (“PPP”) and economic injury disaster loans (“EIDL”).  However, companies seeking to take advantage of the relief provided under this Act should realize that any assistance will come with significant government oversight.  If certain provisions of the CARES Act are not strictly complied with, the government may take numerous enforcement actions that could result in significant penalties and fines.  Now is the time for you and your company to take the necessary proactive steps to ensure compliance with the CARES Act.

This sprawling 880-page piece of legislation contains a myriad of complex provisions – some of which put conditions on certain types of assistance.

For instance, as part of the PPP application process, companies and each owner having a 20% or greater ownership interest will need to certify, in good faith, that, among other things:

  • Current economic uncertainty makes the loan necessary to support the company’s ongoing operations;
  • Funds will be used to retain workers and maintain payroll or to make mortgage, lease, or utility payments (and that if not used for these reasons, the federal government may pursue criminal fraud charges against the applicant); and
  • The company has not received another loan under the PPP.

Critically, you also will need to provide documentation verifying your use of the loan proceeds for the eight-week period following the loan.  This information includes: the number of full-time equivalent employees on payroll as well as the dollar amounts of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities.

A sample PPL application can be found here: https://www.sba.gov/sites/default/files/2020-03/Borrower%20Paycheck%20Protection%20Program%20Application_0.pdf

For EIDL loans, the company must be located in a declared disaster area and must have suffered a “substantial economic injury” as a direct result of a disaster such as COVID-19.  EIDLs are not intended to replace lost sales or profits; rather, they are intended to pay fixed debts, payroll, and other similar operating expenses.

The EIDL application can be found here: https://covid19relief.sba.gov/#/

NOTE THAT THESE LOANS ARE OBTAINED UNDER SWORN OATH THAT THE ELIGIBILITY REQUIREMENTS FOR THE LOAN ARE SATISFIED.  THUS, APPLYING FOR THE LOAN AS A NON-ELIGIBLE BORROWER CARRIES SIGNIFICANT POTENTIAL LIABILITY.  SINCE THE GOVERNMENT WILL RECEIVE INFORMATION FROM YOU, APPLICANTS RUN THE RISK OF AUDIT AND, IF FOUND TO HAVE KNOWINGLY MADE ANY FALSE STATEMENTS TO OBTAIN A GUARANTEED LOAN, FACE SIGNIFICANT FINANCIAL AND OTHER PENALTIES, INCLUDING IMPRISONMENT OF UP TO FIVE YEARS AND A FINE OF UP TO $250,000.

Accordingly, companies receiving funds under the CARES Act may want to follow some of this practical advice:

  • Work with a qualified attorney to establish adequate compliance policies;
  • Carefully review any submissions to the federal government with an eye toward ensuring the accuracy of any representations or attestations;
  • Specifically account for your use of CARES Act funds;
  • Track compliance with certain CARES Act provisions; and
  • Evaluate activities that might be red flags for the new CARES Act watchdogs, such as reductions in force.

In 2008, the government provided significant assistance to companies in the private sector under the Troubled Assistance Relief Program (“TARP”).  Oversight of that program has resulted in numerous investigations and multi-billion dollar penalties against non-compliant participants.  Companies availing themselves of funds under the CARES Act should expect equally rigorous government oversight and enforcement.

If you would like specific guidance regarding compliance with the CARES Act, please contact Karen Stringer () or Jillian Benda Goldberg ().

  The foregoing is intended to be informational and does not constitute legal advice regarding any specific situation.